The blockchain revolution seems inevitable, and its impact on the future of fintech is immeasurable. But will the arrival of blockchain technology be entirely frictionless for its financial adopters?
There’s little doubt that blockchain will be a major force in fintech over the coming years. The blockchain technology market is estimated to reach a value of $69 billion by 2032, representing an astronomical CAGR of 68% over the preceding nine years.
Driven by the continued emergence of cryptocurrency, blockchain will offer comprehensive solutions in the world of finance to issues that seemed insurmountable just a matter of years ago.
At its heart, blockchain is built on decentralization, and this has the potential to revolutionize payments, the flow of data, and the security surrounding fintech. It also challenges legacy financial systems, which have been closely linked to the industry’s institutional players.
But this fundamental change driven by blockchain isn’t without its risks. Could the age of the block be as frictionless as its biggest cheerleaders make out? Let’s take a deeper look at a technology full of promise and uncertainty:
Driving Next-Generation Fintech
Regardless of the disruption blockchain will cause in the burgeoning fintech market over the coming years, the technology will certainly bring plenty of positive innovation throughout the industry.
In moves that are set to remove friction, lower costs, and improve efficiency throughout fintech for enterprises and customers alike, there’s plenty to be excited about for the implementation of blockchain within finance:
Leveling Up Security
Perhaps the single biggest positive driven by blockchain technology will be its security features. Because information is recorded on a decentralized digital ledger, the immutable nature of blockchain means that it’s virtually impossible to tamper with sensitive customer data.
Shared ledgers will help to drive more security in fintech and leverage transactions with less risk of diverted payments.
Today, blockchain transactions require two security keys to work. Firstly, a public key that’s widely visible is needed for every user, and an additional private key is shared between the parties involved in a transaction.
Because blockchain is immutable, transaction data is impossible to modify once it’s been verified on the block.
Achieving Inclusivity
According to Santander data, some 1.4 billion adults worldwide have no access to financial services. These unbanked individuals either live in locations with no banking infrastructure or have been excluded from traditional financial systems for several reasons that don’t reflect their ability to use fintech services.
Blockchain can help achieve greater transparency and accountability because it offers a fully transparent and auditable record of all transactions on the block. This makes it easier to identify and take action against fraud and other nefarious activities.
This greater level of accountability means that those excluded from financial systems can gain access to borrowing and other credit-based financial services based on a fair reflection of their financial behavior, rather than facing flawed credit checks.
Blockchain-powered digital wallets can also empower more users to use banking services without having to physically open an account in a store or pass rigid identification checks.
Embracing Cryptocurrency
At its heart, blockchain is a cryptocurrency-focused technology. Every major cryptocurrency uses blockchain technology to authorize transactions, and this presents plenty of fintech opportunities for users and enterprises alike.
Cryptocurrency and blockchain will open the doors to open finance for all participants. This will be built on the freedom to use any chosen currency to make a transaction on demand.
For internationally focused businesses, accepting cryptocurrency payments can help to welcome secure and borderless transactions at a lower cost while expanding their user base.
The Need for Speed
Blockchain can also help to complete financial transactions in a matter of seconds, when previous complex transactions may have taken a number of days to clear.
This is down to the ability of blockchain to verify transactions without the need for intermediaries or third parties. Simply, once a payment request has been made to one node within a blockchain, it will be transparently processed throughout all nodes.
Minimizing Costs
In addition to faster speeds, the removal of intermediaries means that blockchain fintech services can lower its associated costs.
Although it’s not completely free to make blockchain transactions because gas fees exist, these costs are generally far lower than in traditional financial frameworks.
This contrast can be seen in remittances, where blockchain has the power to reduce around 80% of the extra costs linked to payments.
Weighing Up Blockchain’s Risks
While there are clear advantages associated with blockchain, risks will need to be addressed before the technology can maneuver its way into mainstream acceptance. Key concerns in this area include:
Security Vulnerabilities
Yes, blockchain has a reputation for providing unprecedented levels of security in fintech, but this doesn’t stop risks emerging from shoddy implementations.
In most areas of technology, a system is only as strong as its weakest link. In blockchain, a poorly designed smart contract, weak private key management, and sophisticated cyber attacks can undermine system vulnerabilities and undermine a chain.
To counter this, fintech firms would need to implement a robust infrastructure built on multi-signature authentication, strong access controls, and strong policies focused on private key usage.
Compliance Challenges
There are many compliance concerns surrounding blockchain. As an emerging technology, regulators are having to continually play catch up in ensuring that blockchains are safe and compliant for users.
It can be particularly difficult for blockchain-focused fintech firms to manage compliance due to the decentralized nature of blockchains. This makes it harder to keep on top of the respective Know Your Customer (KYC) and anti-money laundering (AML) regulations.
Loss of Privacy
Although blockchain, when implemented correctly, is certainly a secure technology, its users must face a loss of privacy when it comes to the transactions they make.
Blockchains can’t prevent transactional information leakage because all information on transactions and balances is accessible via public chains.
This means that privacy can be difficult to manage in the age of blockchain transactions, and could lead to problems among consumers in an environment where blockchain purchases are available for all the world to see.
Managing Blockchain’s Potential
The potential of blockchain can offer unprecedented solutions to some of traditional finance’s biggest challenges, particularly in terms of security and inclusivity.
However, we’re entering uncharted waters as far as fintech is concerned, and weak infrastructures built on blockchain technology could risk undermining its transformative potential entirely.
With this in mind, the fintech firms keen to harness the power of blockchain must do so responsibly to ensure that its prospective risks are kept at bay in the brave new world of decentralized finance. This will pave the way for a sustainable new technology that could drive benefits to enterprises and consumers alike.
